Managerial Decisions for Firms with Market Power

Higher unemployment caused by the ression and higher prices have contributed to a substantial reduction during 2008 in the number of vehicles on roads, bridges, and in tunnels. According to The Wall Street Journal (April 28,2009). the reduction in demand for toll bridge and tunnel crossing created a serious revenue problem for many cities. In New York, the number of vehicles traveling across bridges and through tunnels fell from 23.6 million in January 2008 to 21.9 million in January 2009. "That drop presents a challenge, because road tolls subsidized MTA subways, which are more likely to be used as people get out of their cars." In an apparent attempt to raise toll revenue, the MTA increased tolls by 10 percent on the nine crossing it controls.
a. Is MTA a monopolist in New York City? Do you think MTA possesses a high degree of market power?
b. If the marginal cost of letting another vehicle cross a bridge or travel through a tunnel is nearly zero, how should the MTA set tolls in order to maximize profit? In order to maximize toll revenue? How are these two objectives related?
c. With the decrease in demand for bridge and tunnel crossing, what is the optimal way to adjust tolls: raise tolls, lower tolls. or leave tolls unchanged? Explain carefully.

Solution Preview

a. Yes, the MTA is a monopolist. Consumers wishing to drive over a bridge or through a tunnel have no choice but to pay tolls to the MTA. This gives the MTA a high degree of market power.
b. A monopolist, like any firm, ...

Solution Summary

Using market analysis to determine how New York's Metro Transit Authority should respond to a decrease in demand for bridge and tunnel crossings